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U.S. debt bill becomes law, but fails to reassure markets

CTV News.ca Staff
Published Tuesday, August 2, 2011 9:58PM EDT

U.S. President Barack Obama signed a new bill to raise his country's public debt ceiling on Tuesday. But the move failed to reassure investors, as markets tumbled due to signs of continuing weakness in the American economy.

It took weeks to resolve deep-seated differences between political factions on Capitol Hill and pass the legislation despite a looming Aug. 2 deadline. Failure to meet the deadline could have seen the U.S. miss debt payments.

Moody's Investors Service confirmed the United States' AAA credit rating on Tuesday, but the company assigned a negative outlook to the rating.

Meanwhile markets fell despite the news from Washington, due partly to reports suggesting that the American manufacturing sector is slowing and consumer spending is down.

The new U.S. economic figures added to worries over the continuing debt crises in the Europe, pushing markets in Toronto and New York significantly lower. The S&P/TSX composite index slipped 193.31 points to finish the day at 12,752.32, while the Dow Jones industrial average dropped 265.87 points to 11,866.62.

Worried investors also helped push the price of gold bullion up $22.80 to a record US$1,644.50 per ounce.

In Washington, Obama chastised his fellow lawmakers for the partisan bickering that had plagued negotiations over the debt bill.

"It shouldn't take the risk of default, the risk of economic catastrophe to get folks in this town to work together and do their jobs," Obama said.

Hours earlier, 74 senators voted to support the bill, which raises the US$14.3-trillion ceiling on public borrowing enough to last through 2012. Twenty-six senators voted against the bill.

Obama put his signature on the legislation just over an hour after the Senate vote.

The bill also calls for $2.4 trillion in cost cutting measures over the next decade and recommends the formation of a congressional committee to look at long-term fiscal reforms.

It does not include any new taxes to raise revenues for the government.

Now that the bill is passed, Obama said lawmakers must begin to focus on repairing the broken U.S. economy.

Speaking in the Rose Garden, he said a balanced approach is needed to reduce the deficit, including making some adjustments to Medicare and getting rid of tax breaks for America's wealthiest citizens and corporations.

He also said the lengthy debate over raising the debt ceiling -- something that has been done on many previous occasions -- could have been avoided altogether if partisan politics were put aside.

"Voters may have chosen divided government but they sure didn't vote for dysfunctional government," Obama said.

Sen. Harry Reid, the Democratic Majority Leader, said after Tuesday's vote that the bill was created through deep compromise and "no one got what they wanted. Everyone had to give something up."

However, he echoed Obama's point that the agreement is a starting point toward ensuring the U.S. government begins to live within its means.

"Today we made sure America can pay its bills. Now it's time to make sure all Americans can pay theirs," Reid said.

The House of Representatives passed the bill on Monday.

For Obama, one repercussion of the deal is that the debt ceiling will no longer be an immediate concern during the next presidential election. But debate will surely continue on how much America spends and the way it allocates it resources.

Even with an agreement in place on the debt ceiling, there are some economists who believe America's reputation and credit standing will be downgraded in the near future.

Paul Dales of Capital Economics released a statement Tuesday indicating that the U.S. fiscal position still looks "perilous," despite the new legislation.

If all the spending cuts go forward as prescribed, Dales said America will have a national debt in 10 years' time that is still very high in relation to its projected GDP.

"This explains why the U.S. is still likely to lose its AAA credit rating very soon," Dales said in the statement.

"As such, more fiscal consolidation will be needed, which will act as a brake on economic growth for some years to come and result in the Federal Reserve keeping monetary policy loose for longer."

American defence spending, which reached nearly $700 billion in 2010 according to the Stockholm International Peace Research Institute, is one area facing cuts.

On Tuesday, Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, warned that health care, retirement and benefits for military personnel could all land on the chopping block.

Despite talks of deep budget cuts down the road, however, professor Ian Lee with Carleton's Sprott School of Business said the deal "does not solve the U.S. debt crisis."

Lawmakers agreed to cut spending by $2.4 trillion over 10 years, meaning the average annual reduction would be $240 billion. That figure pales in comparison to the annual U.S. deficit, which stands at $1.5 trillion.

"It's basic arithmetic," Lee told CTV News Channel on Tuesday. "This deal is a very small, little down payment on a very big deficit."

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Photos

President Barack Obama walks to the Rose Garden of the White House in Washington, Tuesday, Aug. 2, 2011, after the Senate passed the debt ceiling legislation. (AP / Carolyn Kaster)

U.S. President Barack Obama delivers a statement in the Rose Garden of the White House in Washington, Tuesday, Aug. 2, 2011. (AP / Susan Walsh)

The U.S. Senate approves emergency bill to avert a first-ever government default with just hours to spare on Capitol Hill in Washington, Tuesday, Aug. 2, 2011.

Rep. Gabrielle Giffords, D-Ariz., appears on the floor of the House of Representatives in Washington, Monday, Aug. 1, 2011. Giffords was on the floor for the first time since her shooting earlier this year, attending a vote on the debt standoff compromise.